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Technically, Cisco Systems Is a Sell

Assuming you pay attention to lines on a graph.

We examined the company using moving average convergence-divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

Signal line crossover is one of the more common ways to interpret MACD. It uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below you can find a current chart of Cisco Systems' MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simple as a moving average convergence-divergence chart! OK, we jest -- but in all seriousness, this is actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 20 times in one year.

A better way to size up companiesHere at Fool.com, we're more interested in other measures of company value. When we look at Cisco Systems and its peers, here are the areas that interest us:

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These areas led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at Cisco Systems, don't evaluate it for crossing a momentum line. Buy or sell it because Cisco has one of the most fantastic competitive moats around. Cisco certifications are a must-have for industry professionals, proprietary protocols create further switching costs for companies thinking of migrating from the company, and its IOS networking operating system is about as close to industry standard as you can get.

Despite recent concerns that Cisco was having its market share nibbled away by aggressive rivals, recent studies show the company has been making gains once again. Cisco has held firm in its dominant position in both routers and Ethernet switching. The main stress points for the company appear to be smaller, up-and-coming technologies. Cisco has struggled to topple smaller competitors like Blue Coat and Riverbed Technologies in WAN optimization , and faces F5 Networks that continue to take a share in the application delivery market.

After tepid guidance when it reported its latest earnings, Cisco shares fell like a rock. The company is now trading for 11.7 times this year's expected earnings. When netting out Cisco's massive cash pile, that forward P/E drops to less than 9. Not bad for a market leader in a booming networking market that sports huge competitive advantages.

Want to sell Cisco based on technical merits today? Technically, odds are that you should flip and buy Cisco sometime very soon. If that sounds like madness to you, well, we here at Fool.com agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race toward schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time, most technical analysis schemes are a relatively simple science, eliminating the vast complexities of evaluating true company value. However attractive, this theory is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with as much as 75% of market trading now done by Ph.D.-level programmers at massive high-frequency funds, even if opportunities existed, what chance would an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier: Cisco Systems crossed the crossover 20 times over the past year! While traders might not buy and sell with each crossing, cases of high momentum are normally short-lived. The amount of trading in most technical analysis schemes racks up commission fees and short-term capital gains taxes, eating away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time.

That's why, at Fool.com, we recommend that individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end, we find that to be the best contributor to long-term wealth. More importantly, it'll spare you from sitting bleary-eyed in front of a computer with a Big Gulp full of coffee, frantically buying in and out of companies. But hey, if your idea of protecting your future is charting the ups and downs of moving average convergence-divergence charts, then Cisco looks like a sell right now. Just don't expect to hold it for very long.

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Jeremy Phillipsdoesn't own shares of companies listed above.Try any of our Foolish newsletters today,free for 30 days.True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has adisclosure policy.